Arizona Real Estate License Practice Exam 2026 - Free Real Estate Practice Questions and Study Guide

In the context of real estate transactions, liquidated damages are predetermined amounts agreed upon by both parties in a contract that are to be paid in the event of a breach of contract. The purpose of liquidated damages is to provide a clear remedy that both parties understand beforehand, as opposed to leaving it up to a court to determine actual damages after a breach occurs.

In this scenario, when a seller keeps the earnest money deposit after the buyer backs out, it is a manifestation of liquidated damages. The earnest money is typically specified in the purchase agreement as a deposit meant to secure the buyer's commitment to the transaction. If the buyer fails to complete the purchase as agreed, the seller may retain that deposit as compensation for the inconvenience and potential financial loss caused by the buyer's breach. This amount is considered a liquidated damage because it was predetermined and agreed upon in the contract as a consequence of such a breach.

The other scenarios involve legal remedies that do not fall under the definition of liquidated damages. For instance, reimbursement of a former client for breach typically involves actual damages, while court orders requiring payment of commission or return of earnest money do not align with the concept of predefined damages agreed upon in advance.